Thai Central Bank Defends Cautious Policy After Inflation Falls Below Target
The Bank of Thailand has confirmed inflation is outside its 1–3 per cent target band, but argues the current low rate is due to supply factors—like cheaper energy—and helps ease the cost of living for indebted households
- The central bank attributes the below-target inflation to supply-side factors, such as falling global energy prices and increased food production, rather than weak economic demand.
- It defends its cautious policy by arguing that further interest rate cuts would be ineffective at raising inflation and could introduce long-term risks like unsustainable household debt.
- The bank asserts that the current low inflation is beneficial for households by easing living costs and notes it has already cut its policy rate three times in 2025 to support growth.
- The Bank of Thailand forecasts that inflation will only gradually return to its 1–3% target range by the first quarter of 2027, conditional on stable global markets
The Bank of Thailand (BOT) has issued a formal open letter to the Minister of Finance, explaining why the country’s inflation rate has fallen below the lower bound of its 1–3 per cent target band for the past year and is forecast to remain there for the next 12 months.
The action was mandated by an agreement between the Monetary Policy Committee (MPC) and the Ministry of Finance, which requires the central bank to provide a public explanation when inflation drifts outside the target.
While the average headline inflation for the past 12 months (up to July 2025) was just 0.5 per cent, the BOT firmly stressed that the current environment poses no risk of deflation and affirmed its commitment to a "cautious and outlook-dependent" monetary policy.
Low Inflation: A Supply-Side Story
The MPC argues that the low inflation is not a sign of weak demand or economic stagnation but is primarily driven by specific supply-side factors that monetary policy cannot directly control.
This includes:
Energy Prices: Global oil prices falling from an average of $85 to $73 per barrel, alongside government subsidies to reduce domestic electricity costs.
Food Prices: Favourable weather conditions leading to increased agricultural output and a recovery from the previous year’s drought.
The MPC pointed out that private consumption is still expanding, and with core inflation (excluding volatile food and energy) holding at 0.9 percent, there is no evidence that businesses are struggling to set prices or that the economy is contracting.
Relief for Households, Limited Impact for Rate Cuts
The central bank insisted that the low inflation is currently beneficial.
Given slow income growth and high household debt, lower prices—particularly for fuel and fresh food—help alleviate the cost-of-living burden for the public.
The letter also defended the MPC's decision to cut the policy interest rate three times in 2025, bringing it down by 0.75 percentage points to 1.50 percent.
This was a pre-emptive measure to counter slowing economic growth caused by external risks and tight credit conditions for small businesses and low-income borrowers.
Crucially, the MPC believes that any further reduction in interest rates would be ineffective at bringing inflation back into the target range because the causes are structural, not demand-driven.
Deeper cuts could also introduce long-term risks, such as fuelling unsustainable debt or inefficient investment, while consuming the valuable "policy buffer" needed for future crises.
Outlook and Key Risks
The BOT forecasts that headline inflation will only gradually return to the 1–3 per cent target band by Q1 2027, conditional on global oil markets stabilising.
The central bank confirmed it will maintain its Flexible Inflation Targeting (FIT) framework, balancing price stability with economic growth. It pledged to closely monitor three key risks:
- A widespread slowdown in prices that pushes medium-term inflation permanently below target.
- Volatility in global energy prices due to geopolitical tensions.
- Disruptions from global trade landscape changes and supply chain shifts.
The MPC is required to issue another open letter to the Minister of Finance in six months if the inflation forecasts remain outside the target range, ensuring transparency on their management of price stability.
